WEAKNESSES

High levels of private and public debt, very negative net external position

Duality of labour market, high level of structural unemployment

Large number of relatively unproductive small companies

Fragmented political landscape, unity of the country threatened by separatist movement in Catalonia

RISK ASSESSMENT

Gradual slowing in activity

Spain was again one of the most dynamic of the Eurozone countries in 2017 despite the threat of secession by Catalonia. Growth was driven both by internal and external demand. Household consumption, which grew at a slower rate than in 2016, remained strong thanks to the continued vitality of the jobs market. There is however likely to be a gradual slowing in the level of activity in 2018. The post-crisis recovery is gradually running out of steam. Consumption will increase less quickly, despite the low level of inflation, as the impact of the catching up by households with previously delayed consumer durable purchases begins to wane. Investments however are expected to continue growing and most notably among exporting companies but these could suffer as a result of increasing uncertainties and, specifically, political. The construction sector will remain on its positive track in a context of robust demand and rising prices. Exports will benefit in part from the vigour within the Eurozone economies but given the expected strengthening of the euro against the dollar, this will have an impact on the competitiveness of exports outside the EU as will the negative consequences arising with the slowdown in the United Kingdom.

Despite the relaxed financing conditions, the growth in credit will remain sluggish in a context of ongoing debt reduction within households and companies. The weak state of the credit market in a context of low interest rates will nevertheless continue to undermine the profitability of the banking sector even though its creditworthiness and the quality of its portfolios have improved. Following the adsorption of Banco Popular Espaňol S.A. by Banco Santander for one symbolic euro when it failed the July 2016 stress tests, Spanish banks need to get ready in 2018 for a fresh round of banking stress tests based on a more stringent methodology (IRFS9).

Exiting from the excessive deficit procedure predicted in 2018

The public deficit will continue its slow contraction since 2016. The improvement in the public accounts can be attributed to an increase in revenues and a slight reduction in public spending (lowered social contribution, limited investments and lower interest costs). Unless there is a political consensus following the Catalan crisis making it possible to approve the 2018 budget, the 2017 budget agreed in May 2017 with the support of the Basque minority party, should be duplicated in 2018. There will be a slowdown in budget revenues but spending will continue to be held in check. The reduction in social transfers and the freeze on government employee wages in 2018 will allow for a small increase in public investments. The favourable debt ratio will help contribute to a reduction in the debt servicing burden. If the budget is applied as planned, the public deficit should fall below the 3% threshold in 2018 and allow Spain to terminate the excessive deficit procedure initiated in 2009.

Exporting companies have enhanced their competitiveness since the 2009 crisis thanks to reductions in their labour costs and the restoration of their profitability that has enabled them to win increased market shares. The solid rate of growth in the Eurozone is also expected to help sustain activity but the slowdown in the United Kingdom, Spain’s fourth largest trading partner, could present a threat to those sectors exposed to UK demand, such as the automotive sector (11% of the sector’s exports) and the production of capital goods. The low level of debt interest payments and the cost of energy should also help to maintain the current account surplus.

Risk of Catalan secession because of fragmented parliament

After two consecutive parliamentary elections, the Spanish political landscape was seriously fragmented. The Spanish government formed at the end of October 2016 and led by the conservative Mariano Rajoy has a fragile base. Mariano Rajoy was only able to win a confidence vote in parliament and to bring an end to Spain’s longest governmental crisis thanks to abstentions by a number of socialist Deputies. The commencing of the Catalan crisis with the calling of what was deemed by the Madrid government of an illegal referendum by the Catalan separatists on 1st October 2017, could lead to a realignment of the polarisation of the political chessboard, with the nationalist parties adopting a united front. Following the “yes” vote and faced with the determination of the Catalan authorities under the leadership of Carles Puigdemont to declare independence, the region was placed under central government rule. The enacting of this exceptional provision in the Spanish constitution was followed by the calling of early regional elections, in which the central protagonists for independence, and despite being the subject of legal action, stood and obtained the majority again. This victory is likely to prolong the Catalan crisis, which in view of the results of the PP could occur at the national level. The agreement between the PP, PSOE and Ciudadanos on the Catalan question is not going to eradicate the dissensions within the Cortes (the Spanish parliament). With the government struggling to obtain a majority to approve the 2017 budget, it seems that the inflexibility of its position concerning the Catalan question will in future cost it the votes of Deputies in the small regional nationalist parties. Mariano Rajoy is no longer safe from a censure motion.

Last update : January 2018

Payment

Bills of exchange are widely accepted for commercial transactions in Spain. In the event of defaults, they offer creditors certain safeguards, including access to special collection proceedings with instruments for negotiation under the civil procedures code (juicio cambiario). Bills of exchange which have been guaranteed by a bank can be somewhat difficult to obtain, but they do limit the risk of payment default by offering creditors recourse to the endorser of the bill of exchange.

Cheques are widely used for corporate transactions in Spain. They offer similar legal safeguards under the juicio cambiario in the event of default. The same is true of promissory notes (pagaré), which, like bills of exchange and cheques, are instruments enforceable by law. If unpaid, they are recorded in the registry of unpaid acceptances (RAI, Registro de Aceptationes Impagadas).

Attached to the Centre for Interbank Cooperation, the RAI is the country’s most important registry. It records all commercial payment defaults of over EUR 300, thus allowing banks and other deposit institutions to verify a company’s payment record before extending credit.

Electronic transfers via the SWIFT network, widely used by Spanish banks, are a fast, fairly reliable and cheap payment instrument, provided the purchaser orders payment in good faith. If the buyer fails to order a transfer, the legal recourse is to institute ordinary proceedings, or summary proceedings, based on the unpaid invoice. Banks in Spain have also been implementing SEPA standards for euro-denominated payments.

Debt collection

Unless there are special clauses included in the commercial contract, the applicable rate of interest is that applied by the European Central Bank in its most recent refinancing operation (performed prior to the first calendar day of the half year concerned), with an additional seven percentage points. The rate is published by the Finance Minister every six months, in the Boletín Oficial del Estado.

The statute of limitations for ordinary claims is five years, following the introduction of Ley 42/2015 on the 5th October 2015.

Amicable phase

There are no formalities or conditions for the dispatch of a reminder to the debtor, but it is advisable to send a claim to the debtor first (a burofax, which is an official fax which has legal value). The creditor can obtain guarantees for the payment of the debt. Unless both parties reach an agreement, no interest or penalties can be charged for late payments at this stage.

Legal proceedings

If no settlement agreement is reached with the customer, the creditor can initiate a legal collection process, using civil procedure law (ley de Enjuiciamento civil).

Exchange proceedings

Exchange proceedings are used for claims based on bills of exchange, promissory notes and cheques. A judge of the first instance (juzgado de primera instancia) verifies that the ‘exchange title’ has been correctly implemented and then orders the debtor to make payment of both the principal amount and the late interests and costs, within ten days. The judge will also order a seizure for security (embargo preventivo) on the debtor’s assets, equivalent to the outstanding amount. The debtor has ten days to dispute the ruling.

If there is no payment received or opposition within the prescribed time, the judge will order enforcement measures. If necessary, the judicial representative will carry out attachment.

When claims are contested, a court hearing is held to examine both parties’ arguments and a judgement should be handed down within ten additional days. Although this is time frame that is prescribed under Spanish law, it is rarely adhered to by the courts.

Ordinary proceedings

In addition to the juicio cambiario, creditors unable to reach a payment settlement out of court can enforce their rights through a civil procedure (juicio declarativo). Civil procedures are divided into ordinary proceedings (juicio ordinario) for claims of over EUR 6,000 and oral proceedings (juicio verbal) – a more simplified system – for smaller claims. Both proceedings are initiated with a lawsuit served on the debtor, who is obliged to present their defence in front of the court.

The claimant is required to explain the facts of his claim and provide all supporting documents – either originals, or copies that have been certified by a public notary - on filing its initial petition. Prior to the investigation of the case, the judge will summon the parties during a first hearing (audiencia previa), using ordinary proceedings, to encourage a conciliation. If this is unsuccessful, the lawsuit will be pursued. The court can then order specific measures to clarify issues or facts that remain unclear, before passing judgment.

Monitory proceedings (Juicio monitorio)

For monetary, liquid and overdue claims, whatever the outstanding amount (previously limited to up to EUR 250,000), creditors can now benefit from a more flexible summary procedure. This process does not require the presence of a barrister, or solicitor. The filing of a petición inicial, prepared with a pre-printed form, is directly submitted to the judge of first instance (juzgado de primera instancia) where the debtor is located. After reviewing the supporting documents, the judge can order the debtor to pay within twenty days.

If the debtor does not respond, the judicial representative will inform the judge and request confirmation of the decision in favour of the initial request. The judicial representative then hands down a ruling confirming the conclusion of monitory proceedings, which is transmitted to the creditor. This allows the creditor to contact the Enforcement Office for the next phase. If the debtor disputes the ruling and provides motivated arguments for this within a written statement signed by a barrister and a solicitor, a full trial on the case will be instigated.

Enforcement of a legal decision

When all appeal venues have been exhausted, domestic court decisions become enforceable. If the debtor fails to satisfy the judgment within twenty days, the Court Clerk, upon request, can seek out the debtor’s assets and seize them.

Decisions on foreign awards rendered by EU countries benefit from particularly advantageous enforcement conditions, such as EU Payment orders and the European Enforcement Order. Judgements rendered by non-EU countries are recognised and enforced, provided that the issuing country is party to a bilateral or multilateral agreement with Spain. If no such agreement is in place, Spanish exequatur proceedings will be followed.

Insolvency proceedings

Out-of-court proceedings

A debtor has the possibility of negotiating a formal refinancing agreement (acuerdo de refinanciacion formal) with his creditors. This agreement must be signed by the court. Within this agreement, the parties are free to write off as much of the debt as they deem necessary.

Restructuring proceedings

Restructuring proceedings are launched by filing a petition for an insolvency order. After examination of the petition, the judge makes an insolvency order. Creditors are expected to notify their claims within one month of publication of the insolvency order. The court appoints an insolvency manager, who examines the debtor’s financial situation and establishes a report on its debts. If there is no opposition to the report, the insolvency manager submits the final version to the judge. The judge subsequently orders the commencement of the arrangement phase with its repayment schedule, viability plan and alternative proposals for repayment.

Liquidation

Liquidation in Spain aims to divide the company’s assets once all of its obligations have been satisfied. During this phase, the company retains its legal persona. Liquidators are appointed to execute the process and they can also take over the function of administrative body and company representative.

The liquidator cannot redistribute the company’s assets among its associates until all of its creditors have been paid and payment demands against the company have been settled. Aggrieved creditors can contest transactions that they believe may have taken place illegally during the allocation of the assets. These proceedings can last up to seven years.